Chapter 6 Practice Question Answers
1. Answer: B. Selling short exposes an investor to gains that are limited but losses that are theoretically unlimited. A long position and a long call expose the investor to unlimited gains and limited losses. A short put exposes an investor to limited losses and limited gains.
2. Answer: C. A Designated Market Maker works in an auction market. The NYSE is the largest auction market. By contrast, there are multiple market makers in negotiated markets such as Nasdaq and OTC Link.
3. Answer: A. Securities are issued and first sold to investors in the primary market. The issuer sells these securities to an investment bank at a discount and receives the proceeds from the sale. The investment bankers then sell these securities to investors. When these investors decide to sell these securities to others, it is considered the secondary market. The money that is received from the sales of securities in the secondary market goes to the shareholders who are selling the shares, not the issuer.
4. Answer: A. Stop orders become market orders to either buy or sell once a target price is reached. If the stop order is triggered, because the order becomes a market order, it is guaranteed to execute; however, there is no guarantee on the executio